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Quiz 3 Chapter 5 and 6
Chapter
5—Monetary Policy
1. The
Fed can affect the interaction between the demand for money and the supply of
money to influence interest rates, the aggregate level of spending, and
therefore economic growth.
a.
True
b.
False
2. The
Fed can ____ the level of spending as a means of stimulating the economy by
____ the money supply.
|
a.
|
increase; decreasing
|
|
b.
|
decrease; increasing
|
|
c.
|
decrease; decreasing
|
|
d.
|
increase; increasing
|
3. A
credit crunch occurs when:
|
a.
|
interest rates decline.
|
|
b.
|
interest rates rise.
|
|
c.
|
creditors restrict the amount of loans they are
willing to provide.
|
|
d.
|
the economy is strong.
|
4. According
to the theory of rational expectations, higher inflationary expectations
encourage businesses and households to reduce their demand for loanable funds.
a.
True
b.
False
5. A
passive monetary policy adjusts money supply automatically in response to
economic conditions.
a.
True
b.
False
6. If
the Fed implemented a policy of inflation targeting, and if the U.S. inflation
rate deviated substantially from the Fed's target inflation rate, the Fed could
lose credibility.
a.
True
b.
False
7. In
general, there is:
|
a.
|
a positive relationship between unemployment and
inflation.
|
|
b.
|
an inverse relationship between unemployment and
inflation.
|
|
c.
|
an inverse relationship between GNP and inflation.
|
|
d.
|
a positive relationship between GNP and
unemployment.
|
8. A
____-money policy can reduce unemployment, and a ____-money policy can reduce
inflation.
|
a.
|
tight; loose
|
|
b.
|
loose; tight
|
|
c.
|
tight; tight
|
|
d.
|
loose; loose
|
9. A
loose money policy tends to ____ economic growth and ____ the inflation rate.
|
a.
|
stimulate; place downward pressure on
|
|
b.
|
stimulate; place upward pressure on
|
|
c.
|
dampen; place upward pressure on
|
|
d.
|
dampen; place downward pressure on
|
10. When
both inflation and unemployment are relatively high, there is more disagreement
among FOMC members about the proper monetary policy to implement.
a.
True
b.
False
11. ____
serves as the most direct indicator of economic growth in the United States.
|
a.
|
Gross domestic product (GDP)
|
|
b.
|
National income
|
|
c.
|
The unemployment rate
|
|
d.
|
The industrial production index
|
12. Which
of the following is not an indicator of inflation?
|
a.
|
housing price indexes
|
|
b.
|
wage rates
|
|
c.
|
oil prices
|
|
d.
|
consumer confidence surveys
|
13. The
____ indicators tend to occur before a business cycle.
|
a.
|
leading
|
|
b.
|
lagging
|
|
c.
|
coincident
|
|
d.
|
none of the above
|
14. The
____ indicators tend to occur after a business cycle.
|
a.
|
leading
|
|
b.
|
lagging
|
|
c.
|
coincident
|
|
d.
|
none of the above
|
15. The
____ indicators tend to occur before a business cycle.
|
a.
|
leading
|
|
b.
|
lagging
|
|
c.
|
coincident
|
|
d.
|
none of the above
|
16. The
time lag between when an economic problem arises and when it is reported in
economic statistics is the
|
a.
|
recognition lag.
|
|
b.
|
implementation lag.
|
|
c.
|
impact lag.
|
|
d.
|
open-market lag.
|
17. The
time between when an economic problem is realized and when the Fed tries to
correct it with its policies is the
|
a.
|
recognition lag.
|
|
b.
|
implementation lag.
|
|
c.
|
impact lag.
|
|
d.
|
open-market lag.
|
18. The
time between when the Fed adjusts the money supply and when interest rates
change reflects the
|
a.
|
recognition lag.
|
|
b.
|
implementation lag.
|
|
c.
|
impact lag.
|
|
d.
|
open-market lag.
|
19. If
the Fed attempts to reduce inflation, it would likely increase money supply
growth.
a.
True
b.
False
20. Which
of the following best describes the relationship between the Fed and the
Administration?
|
a.
|
The Fed must receive approval by the
Administration before conducting monetary policy.
|
|
b.
|
The Fed must implement a monetary policy specifically
to the support the Administration's policy.
|
|
c.
|
The Administration must receive approval from the
Fed before implementing fiscal policy.
|
|
d.
|
A and C
|
|
e.
|
none of the above
|
21. A
high budget deficit tends to place ____ pressure on interest rates; the Fed's
tightening of the money supply tends to place ____ pressure on interest rates.
|
a.
|
upward; upward
|
|
b.
|
upward; downward
|
|
c.
|
downward; downward
|
|
d.
|
downward; upward
|
22. The
Fed is usually more willing to monetize the debt when inflation is relatively
high.
a.
True
b.
False
23. International
flows of funds can affect the Fed's monetary policy. For example, if there is
downward pressure on U.S. interest rates that can be offset by foreign ____ of
funds, the Fed may not feel compelled to use a ____ monetary policy.
|
a.
|
inflows; loose
|
|
b.
|
inflows; tight
|
|
c.
|
outflows; loose
|
|
d.
|
outflows; tight
|
|
e.
|
none of the above
|
24. Costner
National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate
loans. It should be adversely affected when the Fed:
|
a.
|
monetizes the debt.
|
|
b.
|
maintains a stable money supply.
|
|
c.
|
uses a tight-money policy.
|
|
d.
|
uses a loose-money policy.
|
25. The
____ lag represents the time from when an economic problem exists until it is
recognized.
|
a.
|
recognition
|
|
b.
|
adjustment
|
|
c.
|
implementation
|
|
d.
|
none of the above
|
26. A
____ dollar tends to exert inflationary pressure in the U.S.
|
a.
|
stable
|
|
b.
|
strong
|
|
c.
|
weak
|
|
d.
|
both A and B
|
27. According
to the theory of rational expectations, ____ inflationary expectations
encourage businesses and households to ____ their demand for loanable funds in
order to borrow and make planned expenditures increase.
|
a.
|
higher; reduce
|
|
b.
|
higher; increase
|
|
c.
|
lower; reduce
|
|
d.
|
lower; increase
|
28. Historical
evidence has shown that, when the Fed significantly increases money supply,
U.S. inflation tends to ____ shortly thereafter which in turn places ____
pressure on U.S. interest rates.
|
a.
|
increase; upward
|
|
b.
|
increase; downward
|
|
c.
|
decrease; downward
|
|
d.
|
decrease; upward
|
29. If
the Fed uses a passive monetary policy during weak economic conditions,
|
a.
|
it increases money supply substantially.
|
|
b.
|
it reduces money supply substantially.
|
|
c.
|
it allows the economy to fix itself.
|
|
d.
|
it focuses on monetizing the debt.
|
30. Which
of the following is true?
|
a.
|
Federal deficits require that the Fed purchase
government securities.
|
|
b.
|
Federal deficits will always result in an increase
in money supply.
|
|
c.
|
The Federal Reserve monetizes debt by selling
securities which ultimately increases money supply.
|
|
d.
|
An agreement between the Fed and the Treasury
exists whereby the Fed is directly responsible for monetizing the debt
whenever the deficit increases.
|
|
e.
|
None of the above.
|
31. Inflation
is commonly the result of a
|
a.
|
large budget deficit.
|
|
b.
|
high level of interest rates.
|
|
c.
|
high level of unemployment.
|
|
d.
|
high level of aggregate demand.
|
32. According
to the theory of rational expectations, if the Fed uses open market operations
in order to increase the supply of loanable funds, the ultimate effect on
interest rates is definitely
|
a.
|
a reduction in interest rates.
|
|
b.
|
an increase in interest rates.
|
|
c.
|
no effect on the interest rates.
|
|
d.
|
the impact on interest rates cannot be determined.
|
33. The
Federal Reserve would be most inclined to use a stimulative monetary policy to
cure a recession if oil prices are
|
a.
|
low and steady.
|
|
b.
|
low, but rising.
|
|
c.
|
very high, but declining slightly.
|
|
d.
|
very high and rising.
|
34. Global
crowding out is described in the text to mean the impact of
|
a.
|
excessive U.S. population growth on interest
rates.
|
|
b.
|
excessive global population growth on interest
rates.
|
|
c.
|
an excessive budget deficit in one country on
interest rates of another country.
|
|
d.
|
an excessive budget deficit in one country on
exchange rates.
|
35. If
the federal government is willing to pay whatever is necessary to borrow
loanable funds, but the private sector is not, this reflects
|
a.
|
the crowding-out effect.
|
|
b.
|
dynamic open market operations.
|
|
c.
|
defensive open market operations.
|
|
d.
|
monetizing the debt.
|
36. When
the Fed uses open market operations by purchasing Treasury securities from
various financial institutions in the U.S., there will be
|
a.
|
an outward shift in the supply schedule of
loanable funds.
|
|
b.
|
an inward shift in the supply schedule of loanable
funds.
|
|
c.
|
no shift in the supply schedule of loanable funds.
|
|
d.
|
an inward shift in the demand schedule for
loanable funds.
|
37. When
the Fed uses open market operations by selling some of its Treasury securities
to investors in the U.S., there will be
|
a.
|
an outward shift in the supply schedule of
loanable funds.
|
|
b.
|
an inward shift in the supply schedule of loanable
funds.
|
|
c.
|
no shift in the supply schedule of loanable funds.
|
|
d.
|
an outward shift in the demand schedule for
loanable funds.
|
38. Which
of the following is not a disadvantage of inflation targeting?
|
a.
|
If the U.S. inflation rate deviates substantially
from the Fed's target inflation rate, the Fed could lose credibility.
|
|
b.
|
The Fed's complete focus on inflation could result
in a much higher unemployment level.
|
|
c.
|
The Fed's complete focus on inflation could result
in much higher interest rates, which would discourage economic growth.
|
|
d.
|
All of the above are disadvantages of inflation
targeting.
|
39. Financial
institutions such as commercial banks, bond mutual funds, insurance companies,
and pension funds maintain large portfolios of bonds, so their portfolio is
____ affected when the Fed ____ interest rates.
|
a.
|
unfavorably; decreases
|
|
b.
|
unfavorably; increases
|
|
c.
|
favorably; increases
|
|
d.
|
Answer A and C are correct.
|
40. According
to the theory of rational expectations, higher inflationary expectations
encourage businesses and households to reduce their demand for loanable funds.
a.
True
b.
False
41. A
passive monetary policy adjusts money supply automatically in response to
economic conditions.
a.
True
b.
False
42. If
the Fed implemented a policy of inflation targeting, and if the U.S. inflation
rate deviated substantially from the Fed's target inflation rate, the Fed could
lose credibility.
a.
True
b.
False
43. If
the Fed attempts to reduce inflation, it would likely increase money supply
growth.
a.
True
b.
False
44. The
relationship between the interest rate on loanable funds and the level of
business investment is positive.
a.
True
b.
False
45. The
supply schedule of loanable funds indicates the quantity of funds that would be
demanded at various possible interest rates.
a.
True
b.
False
46. To
correct excessive inflation, the Fed could use open market operations by buying
Treasury securities in the secondary market.
a.
True
b.
False
47. One
of the disadvantages of inflation targeting is that the Fed could lose
credibility is the U.S. inflation rate deviates substantially from the Fed's
target inflation rate.
a.
True
b.
False
48. Economists
who work at the Fed recognize that a stimulative monetary policy will not
always cure a high unemployment rate and could even ignite inflation.
a.
True
b.
False
49. An
attempt by the Fed to stimulate the economy by reducing short-term interest
rates may have a limited effect if long-term interest rates remain unaffected.
a.
True
b.
False
50. The
Fed needs the approval of the presidential administration to make decisions.
a.
True
b.
False
51. The
Fed is more likely to use a stimulative policy during a strong-dollar period.
a.
True
b.
False
52. A
purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates
and a(n) ____ in the level of business investment.
|
a.
|
increase; decrease
|
|
b.
|
decrease; decrease
|
|
c.
|
increase; increase
|
|
d.
|
decrease; increase
|
53. Which
of the following is probably not a goal the Fed is trying to achieve
consistently?
|
a.
|
low inflation
|
|
b.
|
high interest rates
|
|
c.
|
steady GNP growth
|
|
d.
|
low unemployment
|
54. The
____ is not an indicator of economic growth.
|
a.
|
producer price index
|
|
b.
|
gross domestic product
|
|
c.
|
national income
|
|
d.
|
unemployment rate
|
|
e.
|
All of the above are indicators of economic
growth.
|
55. Which
of the following is not true with respect to inflation targeting?
|
a.
|
The Fed could lose credibility is the inflation
rate deviates substantially from the Fed's target inflation rate.
|
|
b.
|
A complete focus on inflation could result in a
much higher unemployment rate.
|
|
c.
|
Inflation targeting may not only satisfy the
inflation goal, but could also achieve the employment stabilization goal in
the long run.
|
|
d.
|
If unemployment is slightly higher than normal,
while inflation is at the peak of the target range, and inflation targeting
approach would like advocate a loose monetary policy.
|
56. A
____ economic indicator tends to rise or fall a few months after business-cycle
expansions and contractions.
|
a.
|
leading
|
|
b.
|
coincident
|
|
c.
|
lagging
|
|
d.
|
none of the above
|
57. A
weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy.
|
a.
|
U.S. exports; U.S. imports; weaken
|
|
b.
|
U.S. exports; U.S. imports; stimulate
|
|
c.
|
U.S. imports; U.S. exports; stimulate
|
|
d.
|
none of the above
|
58. The
interest rate that the Fed targets for its monetary policy is the:
|
a.
|
commercial paper rate.
|
|
b.
|
federal funds rate.
|
|
c.
|
Treasury bond coupon rate.
|
|
d.
|
1-year certificate of deposit rate.
|
59. When
the Fed purchases Treasury securities, the account balances of the investors
who sell their securities to the Fed _________, and there are _________ in the
account balances of other financial institutions.
|
a.
|
increase; offsetting decreases
|
|
b.
|
increase; no offsetting
decreases
|
|
c.
|
decrease; offsetting increases
|
|
d.
|
decrease; no offsetting
increases
|
60. The
Fed’s monetary policy is commonly intended to alter the supply of funds in the
banking system in order to achieve a specific targeted:
|
a.
|
discount rate.
|
|
b.
|
required reserve requirement.
|
|
c.
|
federal funds rate.
|
|
d.
|
prime rate.
|
61. If
a firm has a credit risk premium of 3 percent and the Treasury security rate is
4 percent, the firm will be able to borrow at ________. If the Fed implements a
monetary policy that raises the Treasury security rate to 6 percent, the cost
of borrowing for the firm will be ________.
|
a.
|
7 percent; 10 percent
|
|
b.
|
4 percent; 6 percent
|
|
c.
|
7 percent; 9 percent
|
|
d.
|
1 percent; 3 percent
|
62. In
the “operation twist” strategy used in 2011 and 2012, the Fed sold _______
Treasury securities and used the proceeds to purchase ________ Treasury
securities.
|
a.
|
long-term; short-term
|
|
b.
|
short-term; long-term
|
|
c.
|
short-term; long-term
|
|
d.
|
long-term; short-term
|
63. The
intent of the Fed’s operation twist strategy in 2011 and 2012 was to:.
|
a.
|
increase long-term interest rates.
|
|
b.
|
require corporations to issue more commercial
paper.
|
|
c.
|
require bond rating agencies to impose higher
standards on their ratings.
|
|
d.
|
reduce long-term interest rates.
|
64. Which
of the following is not a reason that a stimulative monetary policy may
be ineffective?
|
a.
|
The effects of a stimulative policy may be
disrupted by expectations of inflation.
|
|
b.
|
Retirees who rely on interest income may restrict
their spending
|
|
c.
|
Lending institutions may increase their standards
for borrowers, so some potential borrowers may not qualify for loans.
|
|
d.
|
Higher interest rates encourage individuals to
increase their savings.
|
65. In
2012, the Fed stated that it would continue to purchase Treasury bonds in the
financial markets until GDP growth increased to a target level.
a.
True
b.
False
66. Which
of the following was not true of the eurozone during the Greek crisis?
|
a.
|
Fear of a financial crisis throughout Europe
discouraged investors and firms from moving funds into Europe.
|
|
b.
|
By using a more stimulative monetary policy than
it desired, the European Central Bank aroused concerns about potential
inflation in the eurozone.
|
|
c.
|
There was concern that the austerity conditions
could weaken the country’s economy further.
|
|
d.
|
Greece, Spain, and Portugal focused their efforts
on reducing tax rates in order to stimulate their economies.
|
Chapter
6—Money Markets
1. Securities
with maturities of one year or less are classified as
|
a.
|
capital market instruments.
|
|
b.
|
money market instruments.
|
|
c.
|
preferred stock.
|
|
d.
|
none of the above
|
2. Which
of the following is not a money market security?
|
a.
|
Treasury bill
|
|
b.
|
negotiable certificate of deposit
|
|
c.
|
common stock
|
|
d.
|
federal funds
|
3. ____
are sold at an auction at a discount from par value.
|
a.
|
Treasury bills
|
|
b.
|
Repurchase agreements
|
|
c.
|
Banker's acceptances
|
|
d.
|
Commercial paper
|
4. Jarrod
King, a private investor, purchases a Treasury bill with a $10,000 par value
for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is
Jarrod's expected annualized yield from this transaction?
|
a.
|
13.43 percent
|
|
b.
|
2.78 percent
|
|
c.
|
10.55 percent
|
|
d.
|
2.80 percent
|
|
e.
|
none of the above
|
5. If
an investor buys a T-bill with a 90-day maturity and $50,000 par value for
$48,500 and holds it to maturity, what is the annualized yield?
|
a.
|
about 13.4 percent
|
|
b.
|
about 12.5 percent
|
|
c.
|
about 11.3 percent
|
|
d.
|
about 11.6 percent
|
|
e.
|
about 10.7 percent
|
6. An
investor buys a T-bill with 180 days to maturity and $250,000 par value for
$242,000. He plans to sell it after 60 days, and forecasts a selling price of
$247,000 at that time. What is the annualized yield based on this expectation?
|
a.
|
about 10.1 percent
|
|
b.
|
about 12.6 percent
|
|
c.
|
about 11.4 percent
|
|
d.
|
about 13.5 percent
|
|
e.
|
about 14.3 percent
|
7. Assume
investors require a 5 percent annualized return on a six-month T-bill with a
par value of $10,000. The price investors would be willing to pay is $____.
|
a.
|
10,000
|
|
b.
|
9,524
|
|
c.
|
9,756
|
|
d.
|
none of the above
|
8. A
newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day
maturity. What is the discount?
|
a.
|
10.26 percent
|
|
b.
|
0.26 percent
|
|
c.
|
$2,500
|
|
d.
|
10.00 percent
|
|
e.
|
11.00 percent
|
9. Large
corporations typically make ____ bids for T-bills so they can purchase larger
amounts.
|
a.
|
competitive
|
|
b.
|
noncompetitive
|
|
c.
|
very small
|
|
d.
|
none of the above
|
10. At
any given time, the yield on commercial paper is ____ the yield on a T-bill
with the same maturity.
|
a.
|
slightly less than
|
|
b.
|
slightly higher than
|
|
c.
|
equal to
|
|
d.
|
A and B both occur with about equal frequency
|
11. T-bills
and commercial paper are sold
|
a.
|
with a stated coupon rate.
|
|
b.
|
at a discount from par value.
|
|
c.
|
at a premium about par value.
|
|
d.
|
A and C
|
|
e.
|
none of the above
|
12. ____
is a short-term debt instrument issued only be well-known, creditworthy firms
and is normally issued to provide liquidity or finance a firm's investment in
inventory and accounts receivable.
|
a.
|
A banker's acceptance
|
|
b.
|
A repurchase agreement
|
|
c.
|
Commercial paper
|
|
d.
|
A Treasury bill
|
13. Commercial
paper has a maximum maturity of ____ days.
|
a.
|
45
|
|
b.
|
270
|
|
c.
|
360
|
|
d.
|
none of the above
|
14. An
investor buys commercial paper with a 60-day maturity for $985,000. Par value
is $1,000,000, and the investor holds it to maturity. What is the annualized
yield?
|
a.
|
8.62 percent
|
|
b.
|
8.78 percent
|
|
c.
|
8.90 percent
|
|
d.
|
9.14 percent
|
|
e.
|
9.00 percent
|
15. A
firm plans to issue 30-day commercial paper for $9,900,000. Par value is
$10,000,000. What is the firm's cost of borrowing?
|
a.
|
12.12 percent
|
|
b.
|
11.11 percent
|
|
c.
|
13.00 percent
|
|
d.
|
14.08 percent
|
|
e.
|
15.25 percent
|
16. When
firms sell commercial paper at a ____ price than they projected, their cost of
raising funds is ____ than projected.
|
a.
|
higher; higher
|
|
b.
|
lower; lower
|
|
c.
|
A and B
|
|
d.
|
none of the above
|
17. Which
of the following is not a money market instrument?
|
a.
|
banker's acceptance
|
|
b.
|
commercial paper
|
|
c.
|
negotiable CDs
|
|
d.
|
repurchase agreements
|
|
e.
|
all of the above are money market instruments
|
18. A
repurchase agreement calls for an investor to buy securities for $4,925,000 and
sell them back in 60 days for $5,000,000. What is the yield?
|
a.
|
9.43 percent
|
|
b.
|
9.28 percent
|
|
c.
|
9.14 percent
|
|
d.
|
9.00 percent
|
19. The
federal funds market allows depository institutions to borrow
|
a.
|
short-term funds from each other.
|
|
b.
|
short-term funds from the Treasury.
|
|
c.
|
long-term funds from each other.
|
|
d.
|
long-term funds from the Federal Reserve.
|
|
e.
|
B and D
|
20. When
a bank guarantees a future payment to a firm, the financial instrument used is
called
|
a.
|
a repurchase agreement.
|
|
b.
|
a negotiable CD.
|
|
c.
|
a banker's acceptance.
|
|
d.
|
commercial paper.
|
21. Which
of the following instruments has a highly active secondary market?
|
a.
|
banker's acceptances
|
|
b.
|
commercial paper
|
|
c.
|
federal funds
|
|
d.
|
repurchase agreements
|
22. Which
of the following is true of money market instruments?
|
a.
|
Their yields are highly correlated over time.
|
|
b.
|
They typically sell for par value when they are
initially issued (especially T-bills and commercial paper).
|
|
c.
|
Treasury bills have the highest yield.
|
|
d.
|
They all make periodic coupon (interest) payments.
|
|
e.
|
A and B
|
23. An
investor purchased an NCD a year ago in the secondary market for $980,000. He
redeems it today and receives $1,000,000. He also receives interest of $30,000.
The investor's annualized yield on this investment is
|
a.
|
2.0 percent.
|
|
b.
|
5.10 percent.
|
|
c.
|
5.00 percent.
|
|
d.
|
2.04 percent.
|
24. An
investor initially purchased securities at a price of $9,923,418, with an
agreement to sell them back at a price of $10,000,000 at the end of a 90-day
period. The repo rate is ____ percent.
|
a.
|
3.10
|
|
b.
|
0.77
|
|
c.
|
1.00
|
|
d.
|
none of the above
|
25. The
rate at which depository institutions effectively lend or borrow funds from
each other is the ____.
|
a.
|
federal funds rate
|
|
b.
|
discount rate
|
|
c.
|
prime rate
|
|
d.
|
repo rate
|
26. ____
are the most active participants in the federal funds market.
|
a.
|
Savings and loan associations
|
|
b.
|
Securities firms
|
|
c.
|
Credit unions
|
|
d.
|
Commercial banks
|
27. Eurodollar
deposits
|
a.
|
are U.S. dollars deposited in the U.S. by European
investors.
|
|
b.
|
are subject to interest rate ceilings.
|
|
c.
|
have a relatively large spread between deposit and
loan rates (compared to the spread between deposits and loans in the United
States).
|
|
d.
|
are not subject to reserve requirements.
|
28. Which
money market transaction is most likely to represent a loan from one commercial
bank to another?
|
a.
|
banker's acceptance
|
|
b.
|
negotiable CD
|
|
c.
|
federal funds
|
|
d.
|
commercial paper
|
29. The
rate on Eurodollar floating rate CDs is based on
|
a.
|
a weighted average of European prime rates.
|
|
b.
|
the London Interbank Offer Rate.
|
|
c.
|
the U.S. prime rate.
|
|
d.
|
a weighted average of European discount rates.
|
30. Treasury
bills
|
a.
|
have a maturity of up to five years.
|
|
b.
|
have an active secondary market.
|
|
c.
|
are commonly sold at par value.
|
|
d.
|
commonly offer coupon payments.
|
31. The
yield on commercial paper is ____ the yield of Treasury bills of the same
maturity. The difference between their yields would be especially large during
a ____ period.
|
a.
|
greater than; recessionary
|
|
b.
|
greater than; boom economy
|
|
c.
|
less than; boom economy
|
|
d.
|
less than; recessionary
|
32. The
yield on NCDs is ____ the yield of Treasury bills of the same maturity. The
difference between their yields would be especially large during a ____ period.
|
a.
|
greater than; recessionary
|
|
b.
|
greater than; boom economy
|
|
c.
|
less than; boom economy
|
|
d.
|
less than; recessionary
|
33. Which
of the following is sometimes issued in the primary market by nonfinancial
firms to borrow funds?
|
a.
|
NCDs
|
|
b.
|
retail CDs
|
|
c.
|
commercial paper
|
|
d.
|
federal funds
|
34. The
so-called "flight to quality" causes the risk differential between
risky and risk-free securities to be
|
a.
|
eliminated.
|
|
b.
|
reduced.
|
|
c.
|
increased.
|
|
d.
|
unchanged (there is no effect).
|
35. The
effective yield of a foreign money market security is ____ when the foreign
currency strengthens against the dollar.
|
a.
|
increased
|
|
b.
|
reduced
|
|
c.
|
always negative
|
|
d.
|
unaffected
|
36. The
effective yield of a foreign money market security is ____ when the foreign
currency weakens against the dollar.
|
a.
|
increased
|
|
b.
|
reduced
|
|
c.
|
always negative
|
|
d.
|
unaffected
|
37. Treasury
bills are sold through ____ when initially issued.
|
a.
|
insurance companies
|
|
b.
|
commercial paper dealers
|
|
c.
|
auction
|
|
d.
|
finance companies
|
38. At
a given point in time, the actual price paid for a three-month Treasury bill is
|
a.
|
usually equal to the par value.
|
|
b.
|
more than the price paid for a six-month Treasury
bill.
|
|
c.
|
equal to the price paid for a six-month Treasury
bill.
|
|
d.
|
none of the above
|
39. The
minimum denomination of commercial paper is
|
a.
|
$25,000.
|
|
b.
|
$100,000.
|
|
c.
|
$150,000.
|
|
d.
|
$200,000.
|
40. Commercial
paper is
|
a.
|
always directly placed with investors.
|
|
b.
|
always placed with the help of commercial paper dealers.
|
|
c.
|
placed either directly or with the help of
commercial paper dealers.
|
|
d.
|
always placed by bank holding companies.
|
41. An
investor, purchases a six-month (182-day) T-bill with a $10,000 par value for
$9,700. If the Treasury bill is held to maturity, the annualized yield is ____
percent.
|
a.
|
6.02
|
|
b.
|
1.54
|
|
c.
|
1.50
|
|
d.
|
6.20
|
|
e.
|
none of the above
|
42. When
an investor purchases a six-month (182-day) T-bill with a $10,000 par value for
$9,700, the Treasury bill discount is ____ percent.
|
a.
|
5.93
|
|
b.
|
6.12
|
|
c.
|
6.20
|
|
d.
|
6.02
|
|
e.
|
none of the above
|
43. Robbins
Corp. frequently invests excess funds in the Mexican money market. One year
ago, Robbins invested in a one-year Mexican money market security that provided
a yield of 25 percent. At the end of the year, when Robbins converted the
Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is
the effective yield earned by Robbins?
|
a.
|
25.00 percent
|
|
b.
|
35.41 percent
|
|
c.
|
14.59 percent
|
|
d.
|
none of the above
|
44. An
aggregate purchase by investors of low-yield instruments in favor of high-yield
instruments places ____ pressure on the yields of low-yield securities and ____
on the yields of high-yield securities.
|
a.
|
upward; upward
|
|
b.
|
downward; downward
|
|
c.
|
upward; downward
|
|
d.
|
downward; upward
|
45. Which
of the following statements is incorrect with respect to the federal funds
rate?
|
a.
|
It is the rate charged by financial institutions
on loans they extend to each other.
|
|
b.
|
It is not influenced by the supply and demand for
funds in the federal funds market.
|
|
c.
|
The federal funds rate is closely monitored by all
types of firms.
|
|
d.
|
Many market participants view changes in the
federal funds rate to be an indicator of potential changes in other money
market rates.
|
|
e.
|
The Federal Reserve adjusts the amount of funds in
depository institutions in order to influence the federal funds rate.
|
46. Buser
Corp. purchases certain securities for $4,921,349, with an agreement to sell
them back at a price of $4,950,000 at the end of a 30-day period. The repo rate
is ____ percent.
|
a.
|
7.08
|
|
b.
|
6.95
|
|
c.
|
6.99
|
|
d.
|
7.04
|
|
e.
|
none of the above
|
47. Commercial
paper is subject to:
|
a.
|
interest rate risk.
|
|
b.
|
default risk.
|
|
c.
|
A and B.
|
|
d.
|
none of the above.
|
48. If
economic conditions cause investors to sell stocks because they want to invest
in safer securities with much liquidity, this should cause a ____ demand for
money market securities, which placed ____ pressure on the yields of money
market securities.
|
a.
|
weak; downward
|
|
b.
|
weak; upward
|
|
c.
|
strong; upward
|
|
d.
|
none of the above
|
49. In
general the money markets are widely perceived to be efficient in the sense
that the prices reflect all available public information.
a.
True
b.
False
50. Money
market securities are must have a maturity of three months or less.
a.
True
b.
False
51. Money
market securities are issued in the primary market through a telecommunications
network by the Treasury, corporations, and financial intermediaries that wish
to obtain short-term financing.
a.
True
b.
False
52. An
international interbank market facilitates the transfer of funds from banks
with excess funds to those with deficient funds.
a.
True
b.
False
53. The
interest rate charged for a short-term loan from a bank to a corporation is
referred to as the London interbank offer rate (LIBOR).
a.
True
b.
False
54. Money
markets are used to facilitate the transfer of short-term funds from
individuals, corporations, or governments with excess funds to those with
deficient funds.
a.
True
b.
False
55. Because
money market securities have a short-term maturity and typically cannot be sold
easily, they provide investors with a low degree of liquidity.
a.
True
b.
False
56. There
is no limit to the amount of T-bills that can be purchased by noncompetitive
bidders in a T-bill auction.
a.
True
b.
False
57. T-bills
do not offer coupon payments but are sold at a discount from par value.
a.
True
b.
False
58. Junk
commercial paper is commercial paper that is not rated or rated low.
a.
True
b.
False
59. A
line of credit provided by a commercial bank allows a company the right (but
not the obligation) to borrow a specified maximum amount of funds over a
specified period of time.
a.
True
b.
False
60. T-bills
must offer a premium above the negotiable certificate of deposit (NCD) to
compensate for less liquidity and safety.
a.
True
b.
False
61. Most
repo transactions use government securities.
a.
True
b.
False
62. Exporters
can hold a banker's acceptance until the date at which payment is to be made,
yet they frequently sell the acceptance before then at a discount to obtain
cash immediately.
a.
True
b.
False
63. Money
market security values are less sensitive to interest rate movements than
bonds.
a.
True
b.
False
64. During
periods of uncertainty about the economy, there is a shift from risky money
market securities to Treasury securities.
a.
True
b.
False
65. The
price O bidders will pay at a Treasury bill auction is the
|
a.
|
highest price entered by a competitive bidder.
|
|
b.
|
highest price entered by a noncompetitive bidder.
|
|
c.
|
weighted average price paid by all competitive
bidders whose bids were accepted.
|
|
d.
|
equally weighted average price paid by all
competitive bidders whose bids were accepted.
|
|
e.
|
none of the above
|
66. Bill
Yates, a private investor, purchases a six-month (182-day) T-bill with a
$10,000 par value for $9,700. If Bill holds the Treasury bill to maturity, his
annualized yield is ____ percent.
|
a.
|
6.02
|
|
b.
|
1.54
|
|
c.
|
1.50
|
|
d.
|
6.20
|
|
e.
|
none of the above
|
67. You
purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The
Treasury bill discount is ____ percent.
|
a.
|
5.93
|
|
b.
|
6.12
|
|
c.
|
6.20
|
|
d.
|
6.02
|
|
e.
|
none of the above
|
68. A
____ is not a money market security.
|
a.
|
Treasury bill
|
|
b.
|
negotiable certificate of deposit
|
|
c.
|
bond
|
|
d.
|
banker's acceptance
|
|
e.
|
All of the above are money market securities.
|
69. Freeman
Corp., a large corporation, plans to issue 45-day commercial paper with a par
value of $3,000,000. Freeman expects to sell the commercial paper for
$2,947,000. Freeman's annualized cost of borrowing is estimated to be ____
percent.
|
a.
|
14.39
|
|
b.
|
14.13
|
|
c.
|
14.59
|
|
d.
|
14.33
|
|
e.
|
none of the above
|
70. When
a firm sells its commercial paper at a ____ price than projected, their cost of
raising funds will be ____ than what they initially anticipated.
|
a.
|
higher; higher
|
|
b.
|
lower; lower
|
|
c.
|
higher; lower
|
|
d.
|
lower; higher
|
|
e.
|
Answers C and D are correct.
|
71. Which
of the following securities is most likely to be used in a repo transaction?
|
a.
|
commercial paper
|
|
b.
|
certificate of deposit
|
|
c.
|
Treasury bill
|
|
d.
|
common stock
|
|
e.
|
All of the above are equally likely to be used in
a repo transaction.
|
72. A
major drawback to investing in Treasury bills is that they cannot easily be
liquidated.
a.
True
b.
False
73. At
each T-bill auction, the prices paid for three-month T-bills are significantly
lower than the prices paid for six-month bills.
a.
True
b.
False
74. Ignoring
transaction costs, the cost of borrowing with commercial paper is equal to:
|
a.
|
the yield on T-bills of the same maturity.
|
|
b.
|
the yield earned by investors holding the paper
until maturity.
|
|
c.
|
the federal funds rate.
|
|
d.
|
the par value of the paper.
|
75. LIBOR
is:
|
a.
|
the interest rate charged on international
interbank loans.
|
|
b.
|
the average rate charged on commercial loans in
Europe.
|
|
c.
|
the rate charged by the Federal Reserve for loans
to banks.
|
|
d.
|
the rate charged by the European Central Bank for
loans to banks.
|
76. The
LIBOR scandal in 2012 involved:
|
a.
|
banks reporting inflated earnings from their
loans.
|
|
b.
|
hackers breaking into the loan documentation
files.
|
|
c.
|
banks falsely reporting the interest rates they
offered in the interbank market.
|
|
d.
|
collusion among the banks when setting the
commercial paper.
|
77. Credit
guarantees for commercial paper:
|
a.
|
ensures that the issuer of commercial paper will
use the funds obtained to provide credit.
|
|
b.
|
are issued by the Federal Reserve Bank of New
York.
|
|
c.
|
are only as good as the credit of the guarantor.
|
|
d.
|
A and C
|
78. The
money market interest rate paid by corporations that borrow short-term funds in
a particular country is typically:
|
a.
|
equal to the rate paid by that country’s
government.
|
|
b.
|
slightly higher than the rate paid by that
country’s government.
|
|
c.
|
mostly influenced by the demand for and supply of
long-term funds in that country.
|
|
d.
|
set by the country’s central bank.
|
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